You can absolutely use the letters å, ä and ö in a domain name, as long as it is permitted. Whether it is depends on your choice of top-level domain (.se, .nu, .eu, .com and others), since some top-level domains do not support all special characters.
When using a domain name containing å, ä or ö, it is important to remember that the domain has a punycode name behind the scenes. For example, smör.se becomes xn--smr-tna.se in its technical form. This is the form that often needs to be entered in your web server's configuration or in other technical contexts.
Some platforms, systems and social media still struggle to handle domain names with certain special characters. This can cause links to break or email addresses associated with the domain to run into problems. It is therefore worth thinking carefully about how and where the domain will be used before choosing a name that includes å, ä or ö.
For .se and .nu domains, å, ä and ö work perfectly well.
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